What Exactly is an Insurance Policy?
What Exactly is an Insurance Policy?
and
Who/What Does it Cover?
Property and Casualty Insurance is something that we are required to purchase, by either a mortgage company or by a municipality. But what do we know about this? How do we know we are receiving honest and truthful information about a claim? Who can we turn to in case we need to verify what we are being told? Who will give us honest a complete interpretation of the benefits that we are paying for?
Ask The Insurance Answer Man!
In this newsletter, we will focus on The Flood Policy:
Residential Property Coverage:
Most people think of an Insurance Policy as a form of indemnity for loss when damage has been suffered by the owner of the policy, or the person whose name is on the face thereof. But that simple explanation does not correctly describe what the “policy” is or what it does. Further, there are conditions that the owner must adhere to or the coverage can be deleted.
Property Insurance Coverage runs the gambit from the most basic, a DP1 to the HO3 that provides the broadest coverage. Then there is the Flood coverage which is the most restrictive as well as the most misunderstood of them all.
In our first newsletter, we will describe the Flood coverage and tell you about the coverage and the pitfalls so that you will be better prepared to protect yourself in the event of a flood claim. The flood coverage is very restrictive and there are far more conditions and limitations than in a Homeowner policy. Do not presume that all policies are essentially the same. This newsletter is intended to make you aware of most of the coverage issues you might encounter. But I cannot explain every element of the policy in this format as the length would be excessive. So, if you are a subscriber to the newsletter or we have performed a Replacement Valuation on your home, we will counsel you and answer your questions for as long as you maintain your subscription, without any additional cost.
Flood Coverage can be purchased for Residential, Condominiums and Business structures. For this newsletter, we will focus on the Dwelling Form, Standard Flood Insurance Policy last modified in Oct 2021.
Flood Losses:
Most people hear the term Flood Policy and think that they have a policy of Insurance. Actually, all they have is an Act of Congress, aka The National Flood Insurance Act of 1968, which has a great many conditions and exclusions that Traditional Insurance Policies lack. An Insurance Company will spend its own money to pay claims, whereas claims for flood damage are paid by the Treasury of the United States from General Revenue that is allocated to FEMA. Sales of these so-called policies and earned premiums is paid to FEMA, who places those funds in an account to pay claims. But short falls are made up by the Treasury. Regrettably, paid out claims and funds for adjuster and administrator fees etc. have run a huge deficit for years. One of the problems is that underwriting of risks has largely been a hit and miss proposition. If the property is in a flood zone and there is a mortgage on the property, the property owner is required to purchase flood coverage to protect the interest of the mortgagee. If there is no mortgage, and the property is outside the flood zone, the owner can decide whether or not to purchase the coverage but he is not required to do so. Some people game the system by purchasing coverage in July, waiting for Hurricane season to pass, then cancelling in Nov or Dec. This way, FEMA incurs the loss if any, and the owner keeps his expense factor down. Finally, if there is a prior loss history on a property, FEMA keeps paying claims year after year for properties in Flood prone areas. The only risk control that FEMA requires is that the owner must furnish evidence that prior repairs were made before new damage will be considered. In most cases, the adjuster will be required to obtain the prior damage receipts and evidence of replacement. It is often the case that claims of damage, absent the receipts, will result in a failure to be paid again for this damage. If the item in question has an identification tag with a number, the owner should make sure that the adjuster records that information. Then if another flood occurs and the same items are damaged, the numbers on that tag will be evidence enough that the owner got paid from the first claim and replaced the item or items in question. This applies to items such as household appliances, HVAC units and water heaters to name a few.
The US Treasury utilizes FEMA, a government agency under the Department of Homeland Security, as their management agency and FEMA in turn hires a contract administrator to manage all the administrative details including computer data. The administrator hires independent adjusters from all over the country to inspect the flood damage and produce an estimate of the loss upon which payment is made.
The Flood Coverage has several elements to separate a real flood from occasional collection of water standing on random property or flowing onto it. The water needs to be standing on 2 or more contiguous acres to be designated a flood occurrence. Water which flows up from beneath street level and floods houses may not be classified as a General Condition of Flood. I worked wind and rain losses in California, where the rain water from street storm drains overloaded the utility pumps and caused them to shut down. Water began to flow back into the streets and from there into a group of 2 story houses built on slab foundations. That was not considered a flood and FEMA refused to honor the claims.
Why is this designation important? Because, there are some instances where there is a general condition of flooding in an area, but that does not mean that every house is flooded. Water intrusion into the interior may or may not be actual flood. If some property is high and drains well, flood may not have taken place. So further facts need to be determined. In other instances, ditches that carry water from rain can overflow but that may or may not constitute a General Condition of Flooding.
Then there are a whole host of other policies which cover numerous causes of loss depending upon the type of policy issued by a licensed and regulated Insurance Company, completely different from the flood coverage. The Insurance Companies are regulated at the State level while the Flood Policy comes under Federal Jurisdiction.
Insurance Carriers are responsible for the hiring and training of adjusters. The Company is responsible to the public and the adjuster is an agent of the company and both can be the recipients of civil litigation if damages occur because of the actions of the adjuster.
The adjusters hired by NFIP, National Flood Insurance Program, are all self-employed independent contractors, usually working for a company which largely operates as a temp manpower service provider. They furnish the adjusters and review the adjuster’s work product for completeness and conformity in accordance with NFIP requirements. The training of the independent adjusters is mostly performed by NFIP hired trainers who explain the details of the Flood Coverage. This training takes one (1) day with a test at the end of the day and everyone goes home. Many of the independent adjusters, such as me, are highly experienced professionals. But many are not.
There are very few Insurance carriers who have enough staff to handle a large event with a large number of claims. That is where the independent adjuster comes in. The same companies as mentioned above, provide adjusters to the carriers. Like before, most are true professionals. But the potential of a large income can cause untrained persons to try to get in on the act. An example is that I was on a plane traveling to Texas. State Farm was having an adjuster training season so that the adjusters would know the requirements and claim handling procedures of State Farm. The event was being held in a large building on the grounds of the old Dallas TV Show. The person siting next to me on the plane struck up a conversation with me. I learned that he had never done claim adjusting before but he had experience as an HVAC Contractor and wanted to earn a large payday and thought he could pass the SF Test. I have no idea whether or not he passed the test and I never saw him again. But in a big storm situation, many companies lower their standards in order to have enough manpower to meet the need. In the end, the public endures the risk that can befall someone in that situation. Even though I have retired, I have been asked to help the public get a fair shake once they have exhausted all other remedies.
The adjusters who are hired by an Insurance Co are required to go through whatever licensing process is provided by the Department of Insurance of their state. The flood adjusters are issued a paper license which they are required to carry at all times while working. These adjusters are not required to be licensed. Once they pass the test, they are permitted to operate in any state with no restrictions. Staff adjusters are required to be licensed by the state in which they live. The state license is usually active for a period of 4 years after which the license can be renewed subject to each person acquiring a certain number of continuing education credits from state sanctioned trainers. Each state has their own requirements and there is no standardization between the states. Some states do not require adjusters to be licensed although that number has dwindled substantially.
What Amount of Insurance Do You Need?
The amount of the policy is based upon the estimated Replacement value of the Home, with a maximum limit of $250,000. If you have a detached garage, there is no additional amount of coverage that applies. The detached garage maximum amount payable is 10% of the home value. If the damage to the house equals or exceeds the face value of the Flood Policy or $250,000, the coverage for the detached garage is absorbed into the house damage and no additional payment will be forthcoming.
There is no coverage at all for fences or sheds or other appurtenances or structures, whereas there is coverage for sheds and similar items in a Homeowner policy.
The Replacement Insurance Value of the home policy must be no less than 80% of its estimated replacement value or the Replacement Cost portion of the claim is voided and the claim is settled at depreciated value or ACV. Consider this: A man in Galveston Texas bought his flood coverage from his local agent. He later turned in a Flood Claim and I was his adjuster. After inspecting all the damage, I discussed with him what damage would be covered and how the loss would be settled. I told him that his payment would be at depreciated value, a deduction taken for age and obsolescence. He said that he had Replacement Cost Coverage. I told him that he did not have enough insurance, so he would not be paid at Replacement Cost. His reply was that his agent had told him that the odds of damage by flood to the 2nd floor was very high, and suggested that he only insure his home for ½ value. I recommended that he contact the agent to file an errors and omissions claim. The agent must not have understood the flood policy and therefore provided the owner with some pretty bad advice.
The bottom line of this is that the value of the home can fluctuate due to economic conditions and if you don’t keep up with the changing value, it can cost you dearly. This 80% rule applies to Homeowner Policies as well as Flood.
Every Insurance Co. claim or Flood loss, adjuster is required to input data about the property whether it is Residential or Commercial into a computer system which will provide the estimated replacement cost of the structure for insurance purposes. This is a requirement so that the carrier can verify that you are paying the correct amount of premium. If you are, and you have replacement cost insurance, your claim will be paid in full less the deductible. If not, properly insured to value, depreciation applies to the settlement. These deductions can drive up your out-of-pocket funds required to rebuild or repair your home.
How do you find out the estimated cost to rebuild your home? Get your home valued by a professional adjuster such as me. An appraisal by a Real Estate Appraiser is very expensive. But if you fill out the questionnaire I provide, I can enter the details into a computer program and give you a value. I use Xactimate, a software program that I used in the field and which most Insurance Co’s recognize as factually based. I have used this program for 15 years and the valuations it produces are accepted by the Ins Co’s. The cost for me to provide this service is $150. Please review my fee structure for details.
General Loss Adjustment Details:
If the water line inside the house is 2ft above the floor, your claim will pay for 4 ft, the width of a sheet of sheetrock. If the water line is 5 ft, the adjuster will allow up to 8ft. The claim will NEVER include payment for a partial sheet of sheetrock. Then the entire wall will be painted. If the ceiling is damaged by wind, each claim, flood and Homeowners will pay their respective loss. If you have more than 1 Flood Policy, each policy will pay its percentage of the loss if the policy amounts are different, otherwise 50/50. If your house in on a concrete slab, when the floor covering is removed, the adjuster should allow for treatment with a disinfectant of the slab including up to the water line of the wall. If your house is on a crawl space, the adjuster should allow for the removal of contaminated soil beneath and to put back clean soil and spray the underside of the house with disinfectant. Some instances where this has not been done has gotten people sick. Flood causes dirty and foul water to come out of your storm drains and sewer lines and contaminate everything it touches.
The exterior of your home is different than the interior. A house with Brick veneer can be pressure washed. But for a house with vinyl siding, the siding must be removed, cleaned and reinstalled. But the insulation material attached to the wall framing should be replaced. Other forms of siding such as stucco or other soft materials should be replaced.
Flood does not pay for damage to shrubbery or outdoor decorative items.
When a flood occurs, people tend to remove their flood damaged sheetrock, flooring and furniture and pile these things up at the street. Then when the adjuster arrives, some or all of these items have been removed by the local municipality. You should take pictures of each item you remove and make a note about the item, where and when it was purchased and what it cost originally. If you know the current replacement cost of a similar item, make a note of that. The adjuster will usually provide inventory forms for your personal property. The pictures will prove ownership as well as something about the item that will be valuable in concluding your claim. I have been to flooded homes and everything inside is outside in a pile, sometimes above my head. I am not going to sift through that pile to verify what is on the inventory was actually owned property. So, lots of pictures will make the claim go much smoother. Also, some people think that the insurance claim is a good way to sell things to the insurance company, that they wanted to dispose of anyway. That does not work most of the time.
Your contents claim is settled at ACV, deducting for age and obsolescence. Most carriers agree that the maximum depreciation is 50% of replacement value. So, make certain to look your items up on the internet or establish the replacement cost so that the adjuster will take depreciation from the higher amount. Your contents have a separate deductible than your house claim.
Coverage Pitfalls:
I had a claim where the property owner purchased a duplex in Pennsylvania so that he could live in one side and his daughter and grandchild could live in the other. The owner did not charge rent to his daughter. I tried to convince FEMA that this was not a traditional duplex, but they refused to pay more than half the damage because they only cover single family homes. This underwriting issue should have been discovered by his agent, instead it ended up costing that homeowner a great deal of money.
I always recommend that a homeowner take a lot of pictures of all their personal property, before the flood loss occurs. Make a list by room location of everything you own and write it down on a piece of paper which you can file away or place in a Bank Lockbox to preserve and protect it. Then while you have no claims, look around in department stores occasionally or check out sales ads and cut out the ads for similar items and write down the sales price. This will make this part of the job much easier when the adjuster gives you the inventory forms.
If the home is properly insured to value, within the 80% rule, the damage will be paid at Full Replacement Cost. But the Contents are only paid at ACV (actual cash value) or depreciated value. There is no coverage for any additional living expense costs. So, if you must relocate to the home of a friend or relative because you can’t afford a hotel, for your family, be sure to be able to return home to meet with the adjuster. When you leave the home, take an ample supply of clean clothing with you and if you are forced to stay in the house and fight off the storm, be sure to keep your gas grill propane bottle full and try to have a supplemental bottle for cooking food and boiling water.
The removal and/or disposal of water damaged items are covered if performed by a third-party company and a cost to you is incurred, so be sure to get a receipt. If you do the removing, the flood policy will reimburse you and members of your family at the Federal Minimum wage rate. There is no additional coverage for this coverage, just like the detached garage.
Conclusion:
There are many people who should buy flood coverage but don’t. They think that because they don’t live near a body of water that they are not susceptible to be damaged by flood. But excessive rain, among other causes, can produce copious amounts of water.
If you are not in a flood designated zone, the cost of this coverage is very affordable.
The cost of this newsletter is $5 per mo. or $50 per year. As you have seen, some agents make terrible mistakes underwriting these properties. I will give you honest information and answer your questions from the perspective of someone who has been in the field for nearly 50 years.
There is no charge for this newsletter but we will begin to charge a subscription fee beginning in December. Please subscribe.
In our next newsletter will, we will discuss the Personal Auto Policy.
